Is the chronically stagnant US economic recovery since 2009 (predicted in my 2010 book, ‘Epic Recession: Prelude to Global Depression’), the result of insufficient income growth for most households—that is then necessary to stimulate consumption demand that, in turn would result in real investment that would create jobs? Or has the escalation of financial asset prices since 2009—itself the consequence of $10-$15 trillion of Fed and central bank liquidity injections— resulted in lower real investment in the US and thus the failure of job and income growth?
To restate more simply: does the lack of wage and income growth determine real asset investment; or are the expanding opportunities for more profitable financial asset speculative profits globally driving the decline of US real asset investment (and thus jobs, wages, and income growth)?
Which is the more primary causal relationship? If one believes lack of income is the primary cause of declining real investment today in the USA, then the solution is simply to raise wages and income of households that typically spend by whatever means—tax cuts, subsidies, etc. The problem is simply an insufficient level of income.
But what if, alternatively, it is not income that determines real investment, but rather the addiction of investors to financial asset speculation and investing that is the main determinant of slowing real asset investment?
If the latter is primary, then simply raising wages and incomes alone will not necessarily ensure real investment returning to historical levels in the US economy. That is, the determinants of real asset investment lay just not with inadequate income growth in the US, but with the expanding and more profitable financial investment opportunities in a 21st century finance capital world in which investors are increasingly addicted to financial asset speculation forms of investment.
This is a critical distinction that mainstream economists fail to understand (and some ‘left’ economists only partly understand). It is important because merely boosting wages and incomes of median and below households will not, by itself, generate sustained real investment and recovery in the US economy. That’s a Krugman-Reich-Stiglitz notion. It is also a classical ‘underconsumptionist’ argument that those who follow Marx should know Marx himself rejected unequivocally.
Sustained recovery requires direct investment, not just a rise in consumption income that hopefully might convince capitalists to again reinvest in the US (or not convince). So the problem is not merely a lack of income growth to stimulate investment. US capitalists are investing–just not in real asset investment and not in the US. They are investing in emerging markets, and even more so in financial asset markets globally (which are now more numerous, liquid, and available than ever before due to the creation of an unregulated global shadow banking system). That’s where the Fed’s $15 trillion money injection is going (some of which is also just being hoarded on balance sheets, of course).
The more fundamental problem is that finance capital has changed. Raising incomes of workers and middle class Americans will help recovery somewhat, but not all that much. It will not result in sustained economic recovery any longer. It is therefore not the main solution to the long term economic stagnation that the US has been experiencing since 2009. Capitalist profit opportunities are simply greater offshore in EMs, and in financial asset markets, than they are from making goods and services in the US, even if US workers were able to buy those real goods and services if they had more income.
Neither mainstream liberal economists, nor even many US Marxist economists, understand the differences, or the important mutual causal relationships between financial asset investment and real asset investment, which is key to understanding today’s long run global economic stagnation trends in the US, Europe, and Japan ‘heartland’ of the global capitalist economy.
To argue simply for wage and income growth as the solution to a chronic stagnant US economic recovery—as Krugman and colleagues do for example—is to assume that capitalist enterprise will redirect itself from more lucrative profit opportunities from financial speculation and in offshore markets, back to less profitable real production of goods and services in the US. They won’t to any significant extent, since rates of return in the latter are significantly less than in the former.
The only real solution to a sustained US recovery is for massive public government investment, that then subsequently creates income. Investment precedes income creation, it does not necessarily follow it any longer in a world of 2st century global finance capital. Just calling for income growth (via minimum wage hikes, more low pay contingent job creation, tax cuts, or whatever) will not necessarily result in a rise in US-based investment if Capitalists continue to shift to more profitable financial speculation offshore; public investment on a major scale must therefore occur prior to income growth in order to generate a sustained recovery.
Krugman and his neo-Keynesian colleagues don’t understand this essential error in their analysis. They simply believe all forms of consumer demand stimulation are the same. Only the aggregate amount matters. (which, by the way, Keynes himself did not maintain, so they aren’t even really Keynesians at all).
Neo-Marxists should beware of this idea that ‘simply raising wages and incomes is the solution to economic recovery’. They should understand that the financial bubbles being created again around the world are not a consequence of declining real asset investment but are a cause of it. They should beware of slipping into an argument of promoting dead-end underconsumptionism in its many variant forms.
In today’s world of 21st Century Global Finance Capital, don’t expect capitalists to invest in real production and thus jobs and income in the US economy as they did decades ago. They are too busy making greater profits offshore and in financial asset speculation, leveraging the trillions of dollars of free money and credit created for them by the Federal Reserve. If real investment in the US economy is ever to return, it will have to come via major public investment initiatives. And if not, expect chronic real economic stagnation to continue, as has been the case since 2010.
Dr. Jack Rasmus
Green Shadow Cabinet Federal Reserve Chair
July 26, 2014
Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 
Very well stated and an important distinction which even (especially) our political and economic allies need to consider –
I am a admirer of your work and I listen to alternative visions every week.
Wolff clearly understands the distinctions between insufficient income levels for workers versus the addiction to financial asset speculation by wealthy capitalists.
I believe he would agree with you that the later is the bigger problem to recovery.
I do not view Wolff as falling into “dead-end underconsumption” arguments.
Wolff is primarily concerned with creating WSDEs (ex. Mondragon) as the solution to sustain US recovery. Wolff repeatedly advocates for massive government investment. I believe Wolff is closer to a lot of your ideas than it first may appear from his comments with Thomas Hartmann.
I agree with what you’ve said. Why invest when you can take the almost-free Fed money and have a field day in emerging markets, stock markets, buying back your own stock, speculative buying of so-called rental housing, etc.
Raising the minimum wage or wages overall helps in the short-term, but it then causes prices to increase (too much money chasing goods), and pretty soon everybody is back asking for a raise in wages again. It’s a vicious cycle.
No one should have been bailed out in 2008 – no one. The big banks should have been broken up; instead, they’re even larger now. The rich have gotten richer; the poor, poorer. When does this end?
So now it’s time for “public investment initiatives”? Doesn’t that just paper over what’s happened? So cheap Fed money pumped up asset prices (stocks and housing) to artificial levels and now – what – we want more debt piled on so that we can keep those artificial prices up there? This is a Ponzi scheme facilitated by more and more debt. Every time you increase debt, you debase the currency, which causes prices to rise.
Stop bailing everybody. Let prices come back down, revert to the mean. Who doesn’t like cheaper prices? It’s not what you make; it’s what you can buy with what you make. QE should never have been started, but since it did, it should end tomorrow. It was nothing more than bailing out the rich.
Let the market find its own level.
I would disagree with you on two points. Minimum wage increases don’t lead to price inflation, and there is virtually no wage-price spiral of any kind for decades now. So raising minimum wage, or any wage, won’t result in inflation. Moreover, wage increases do not increase the money supply, so min. wage hikes have nothing to do withi ‘too much money changing too few goods’. That, as you note, is a function of the federal reserve pumping liquidity into the market and creating credit. Credit creation by the way is also done by the private banking and shadow banking system. In fact, all money and credit creation ultimately comes from the private banking system, although free money from the Fed provides the incentive. (Except when the Fed purchases bad assets directly, as ‘QE’, that is money creation and ‘too much money chasing too few goods’.
I agree, banks should not have been bailed out. BUt then the banks own the Fed and the government, so it wasn’t any surprise. The latter have been bailing them out since 1966, each time a greater cost of bailout.
Finally, don’t confuse ‘public investment’ with assumption that it must always be debt and deficit financed. That’s a myth. I’m talking about public investment corporations created by the government (not this one of course), that are not deficit financed. To see how this works, see the concluding chapter of my book, ‘Obama’s Economy: Recovery for the Few’.
‘Let prices come back down’? If you mean financial asset prices, that’s coming. The debt bubbles in the private sector (junk bonds, CLOs, farm land, securitized auto loans, leverage loans, etc.) are not far off from a major deflation. As for goods and services prices, there’s no inflation because there’s insufficient demand by consumers for these. Here the problem is disinflation, and eventually deflation–such as in Europe and growing elsewhere.
‘Let the market find its own level’, you say? What if that level is a chronic stagnation, or worse, a depression. Should it be allowed to happen? Who will get hurt most? Not the folks getting mega-rich today. They have their government to bail them out.
And if you stop bailing people out, making work for them, perhaps then they’ll actually notice and get angry that most of their good-paying jobs have gone, never to return. It is pain that will wake them up to these various secret trade deals now being hammered out (which will no doubt “hammer” the people).
How are people ever really going to realize the skeleton their former country is if they keep getting bailed out? Give them a chance to see it. Let them start to wonder, just enough to get them onto the Internet so they can find out just how many jobs have gone, where they’ve gone to, how the multinational corporations don’t care about country any more.
Let the people get angry at what’s been done to their country. Stop bailing them out. Let them feel “some” pain. To struggle is to grow.
I think people are indeed ‘angry’ enough. They are feeling the pain, as you put it. So why are they not doing more? Because there is no apparent organizational alternative, besides just voting for one or the other wing (Republican v.Democrat) of the Corporate Party of America (or the faction of small business, funded by billionaires called the Koch brothers, sometimes referred to as the Teaparty (not actually a party, but a faction pressure group within the Republican Party, where small businesspeople are fighting it out with big business). People don’t rise up because conditions get worse. They rise when they see a viable alternative, and there is none at present to turn to. They thought falsely it was Obama in 2008, but that was the biggest con job perpetrated on well meaning electorate wanting change in more than a century.
[…] On the Causes of Investment Decline in the U.S. Economy by Dr. Jack Rasmus, the Green Party’s shadow Federal Reserve chair. Hat tip to Bill Harvey. […]
jackrasmus – thank you very much for your very intelligent responses. It is a real mess, isn’t it? I’ll check out what you have to say about public investment corporations. Sounds very interesting.
The only thing I would disagree with (and it doesn’t matter, really) is I believe people will only change (like someone addicted to money, drugs, whatever) when they hit rock bottom. That is when they change. There are always different choices we could make, but we don’t make them until we feel some pain.
Wishing you good luck with your book. Thank you.
Enjoyed the article and the insights more than usual. Couldn’t fully grasp the meaning of the last sentence in the penultimate chapter, however. If you could elucidate some I’d be grateful.
There’s a good graph of “Net Business Fixed Investments” at a CBO report, page 36: http://www.cbo.gov/sites/default/files/cbofiles/attachments/45010-Outlook2014_Feb.pdf
From 1960 to 2000 it averaged around 4% of GDP, since 2000 around 2%. In 1999 it held at about 5%, in 2010 it was around 0.9% — a huge plunge.
Professor Wm Lazonick at Huffington Post a few years ago wrote: “For 2001-2010, 459 companies in the S&P 500 Index in January 2011 distributed $1.9 trillion in dividends, equivalent to 40 percent of their combined net income, and $2.6 trillion in buybacks, equal to another 54 percent of their net income. After all that, what was left over for investments in innovation, including upgrading the capabilities of their workforces? Not much.”
94% of profits over ten years going into non-productive purposes, not fixed investment. It’s a disaster.
http://www.huffingtonpost.com/william-lazonick/how-american-corporations_b_1399500.html
I checked the BEA and made a graph of expanding corporate profits since 2000 to 2014. Adjusted for inflation profits jumped from $635 billion to $1,920 billion, a tripling. Part of the justification for QE 3 was that low interest rates would stimulate more loan creation for investment in fixed assets, resulting in more jobs. With all those profits, raising capital is not a concern.
There is a symbiotic relationship between household economies and corporate economies, and that symbiosis is broken. I think corporate tax rules should penalize companies that do not re-invest profits, and if they maintain a severe salary ratio between executive and low-paid employees. The corporation is a fabulously productive invention — and most workers are employed in operations or firms with more than 100 workers — but it has to serve its purpose of enriching the workers —- 94% of profits to dividends and stock buy backs! — it’s obviously been hijacked by a creed of greed.
Last — WalMart in 2013 I believe had $7.6 billion in profits to deal with, it chose to buy back stock, but it could have raised average wages from about $9.60 an hour to $14.80, a 60% pay raise. It didn’t raise wages, the Walton’s took it all for themselves. (This is at Mother Jones if you want to look for it.)
I don’t hear any politician talking about restructuring corporate taxes along democratic standards of high pay. Labor was 66% of total income, and now it’s 58% according to Harold Meyerson writing at American Prospect — that drop in wages is about $12,000 income loss per ALL lower-earning 80% of families. Add $12,000 to lowest 20% of households and poverty might be nearly eliminated. It might fix the investment story, it might lead to mandatory paid vacation time for all. Etc., etc.. Good article, an important, crucial topic.
Thanks for the excellent contribution. I do hope readers will take a look at it.
Dr. Jack Rasmus
You could certainly see your enthusiasm in the work you write.
The sector hopes for more passionate writers like you who aren’t afraid to mention how they believe.
At all times follow your heart.
I’m impressed, I have to admit. Seldom do I come across a blog that’s equally
educative and interesting, and without a doubt, you have hit the nail on the head.
The issue is something too few folks are speaking intelligently about.
I am very happy I found this in my search for something
relating to this.
Reblogged this on Don Sutherland's Blog and commented:
I think this analysis is really important and is relvant the Australian context also. Here,the opposition to the Federal government and Business Council austerity prescription for the economy, is strong but it is built on the assumptions of Keynesian economics. In the past week I have had brief and friendly exchanges with union comrades who hve been praising Keynesian journos and commentators. I understand why: in Australia we are constantly desperate to find and promote those who oppose the barrage of neoliberal / austerity capitalist dogma that is our daily bread. Any port in a storm, so to speak. But, this is not good enough. Analysing the interactions between investment, profit, incomes etc – but at last foussing on investment is a gap that must be filled.